Making it all add up

first_img Previous Article Next Article Comments are closed. Making it all add upOn 12 Mar 2002 in Auto-enrolment, Personnel Today Related posts:No related photos. The ‘perfect’ payroll system comes at a price – time andeffort in preparation. Only once a requirement list is drawn up in view of thewider HR picture, and departmental changes earmarked, can a worthwhileselection be made. Keith Rodgers reportsCompared to more complex enterprise applications, buyingpayroll software should be a relatively straightforward exercise. The processesare usually well established within organisations, the IT market is mature andthe basic requirements are fairly standard. The reality, however, is that many companies still fail tomake the best choice when they go through the selection process. This is partlybecause payroll options have proliferated in recent years – as well as avariety of standalone applications and modules, vendors offer a range ofoutsourcing services, from management of the entire payroll function to remote‘hosting’ of the application. But part of the blame lies with users themselves. Mostpurchasers of HR software focus on features and functionality, believing thekey task is to find the most suitable application at the best price. But to getthe maximum return from implementation, users need to tackle a far broaderrange of issues, including the total cost of ownership and management ofservice and support agreements.In many ways, the payroll function is being pulled indifferent directions. On the one hand, few would argue that these systems arestrategic – they are primarily process-based and add little value in terms ofleveraging an organisation’s human capital asset base. On the other hand, they play a central role in the smoothrunning of any enterprise – salary may not be a positive motivator for mostemployees, but when things go wrong it is invariably a negative factor. Asstatutory requirements for employers continue to grow, getting the payrollservice right becomes a delicate balance between cost constraints and the need for efficiencyin a highly sensitive HR function.Simplify the process The message from software vendors, consultants and industryanalysts alike is that many companies are making the whole process tougher thanit needs to be. Software selection, which on the surface appears an elementarypurchasing task, requires far more preparation than most organisationstypically undertake. At the same time, purchasing new payroll applications oroutsourced services presents a major opportunity for companies to streamlinetheir existing activities, cut costs and improve their operationaleffectiveness. Not every buyer is grabbing the opportunity, however.The selection process effectively boils down to fourinterconnected elements: l Understanding the organisation’s true payroll needs ● Deciding whether to run an application in-house oroutsource ● Establishing the total costs associated with theshortlisted options, including ongoing fees and ‘soft’ outgoings such asdraining of resource● Assessing the suitability of shortlisted suppliers. A fifth element – building the contractual framework for aneffective business relationship with the application or service provider –completes the purchasing process.Surprisingly, it is in the first area that most companiesfall down. David Spencer, manager at Andersen’s human capital practice in theUK, argues that a common mistake is for users to fail to understand theircurrent operations – how the payroll system is integrated with other HR andfinance applications, whether the right information is reaching the rightpeople, and whether the company is complying effectively with statutory payrollobligations.Kevin Gordon, strategic sales director at Rebus HR, says:“It is about understanding what you are trying to achieve by changing thesystem. If the company is not clear, there is not a chance in hell that the vendorcan deliver it.” As Gordon points out, all payroll applications should have thefunctional capability to handle the gross-to-net process. The key point is towork out what the unique needs of the business are. As well as helping define users’ software requirements, thisreview process should also provide a platform for internal improvements. Onevendor tells of a payroll site that historically required interfaces to twodifferent general ledger systems. Even after the financial applications were consolidated,it continued to build both sets of interfaces in the next two generations ofpayroll application, despite the fact that half that work was redundant. Companies can take the opportunity to clean up these processanomalies and measure the effectiveness of their existing operations – bycomparing the ratio of payroll clerks to employees, for example, and comparingthat to industry averages. This kind of assessment may go to the heart of theorganisational structure. Are there too many grades of pay, for instance – andif so, does that reflect a structure that has become overly complex?It is also important to bear in mind that payrollimplementation can’t be carried out in isolation – while the department itselfmay have its own wish list, the broader needs of the HR and finance departmentsmay ultimately determine what kind of application is selected. Organisationsneed to determine where they draw the line between payroll and otherapplications such as time-recording systems. Team effortTo ensure the selection process is inclusive, consultanciessuch as Andersen recommend that a working group be formed comprisingrepresentatives from payroll, HR, IT, finance and any other function with avested interest in the process, frequently reporting to the finance director.This group may need to report even further up the managementchain when it comes to determining whether payroll applications should bepurchased outright or outsourced, particularly if an organisation has acorporate policy to contract out non-strategic functions. That decision willalso have an impact on the third element of the selection equation –establishing upfront and ongoing costs – and much of the focus in theoutsourcing arena has been on comparing the relative financial models of thetwo approaches.Typically, organisations tend to focus on the cost ofone-off software licence fees when they opt to keep payroll in-house – the trueongoing cost of ownership, however, is much higher. Depending on the amount ofintegration work required between other systems and the degree to whichsoftware is customised, the licence itself may only account for between 30 and50 per cent of the total lifetime cost of the application. Additional chargescome in the form of consultancy fees, both to adapt business processes and at atechnical level, for implementation and integration services. The ratio of licence fee to implementation services willtypically be 1:1 to 1:2, depending on the scale and complexity of the project.Ongoing software maintenance fees also rack up – they are typically charged atbetween 15 and 20 per cent of the licence fee per year and cover the cost ofsoftware upgrades and some level of technical support.Other charges include the cost of training – both for ITstaff and end-users – and if necessary, an allocation for in-house IT support. The ongoing cost equation is also heavily influenced by thedegree of customisation users carry out on the application itself. While somelevel of personalisation is inevitable when a new system is installed, there isa big difference between superficial changes (such as adjusting screens) anddeeper customisation that alters the system’s hard code. Any major changes‘under the covers’ are likely to have a significant impact down the line becausethey require further customisation work each time a major software upgrade isreleased.Andersen’s Spencer says: “It becomes very expensive if youbuy off-the-shelf and customise too much. The more customisation you do, themore problems you have.” These issues are frequently highlighted by outsourcingservice providers as justification for handing payroll to a third party, eitherthrough a fully-fledged functional outsourcing agreement or through an IT-basedservices contract. The most comprehensive outsourcing offering – a facilitiesmanagement or managed services operation – sees a provider taking control ofthe entire payroll operation, including payroll staff. Application Service Providers, by contrast, ‘host’ only thepayroll application, which is accessed by the user through the internet. Bureauservices fall into the middle, hosting systems remotely but also offering arange of specialist add-on services such as payslip printing. While there aresignificant differences between the offerings, in each case one of the keybenefits is that capital expenditure is removed and ongoing charges arepredictable. Stephen Fairn, sales and marketing director at outsourcingprovider Ceridian Centrefile, says, the costs are ‘genuinely budgetable’,rising and falling in line with the evolution of the user’s business aspersonnel numbers increase or are cut back.The other side of the outsourcing equation, however, shouldnot be overlooked, particularly in the ASP business. When the ASP model firstburst onto the IT scene in the 1990s, many believed it would offer ahigh-quality service at a cut price. In reality, the prices are not usuallycheap – the service providers are taking on a large IT administrative burdenand charge a suitable fee for doing so. In addition, industry analysts andexponents of the traditional licensing model argue that the ASP route caninvolve hidden costs for unforeseen services that fall outside the strictservice contract. Tim Tobin, commercial director at Snowdrop Systems, suggeststhat users should clarify how ASP vendors handle payroll variables – fromchanges to bonus structures to business reorganisations – to ensure that theuser has the required flexibility. More significantly, take-up of the ASP model has been farbelow the initial hyped projections, and there is some cynicism in the marketabout the model. Initial experiences weren’t always good: a number ofspecialist providers collapsed, and there has been concern about the poorquality of support offered by some start-up providers. However, as the industry matures, most of these issues arebeing resolved, and many expect the ASP model to enjoy some level of resurgencethrough quality specialist providers and major vendors. The fourth element of the selection process – supplierassessment – is a combination of financial due diligence and partnermanagement. In a field where legislative requirements call for continualupgrades, vendor viability is critical, and users need to have confidence bothin their supplier’s financial standing and its ability to provide ongoingsupport and product development. Some of these long-term concerns are hard to allay – furtherconsolidation in the IT industry is inevitable at every level, and the softwaresector is littered with examples of product lines that have been dropped in theaftermath of a takeover. Purchasers can, however, do more at a practical level toensure the levels of service and support they demand from suppliers arecontractually laid out from the outset, particularly in defining a servicelevel agreement that contains practical metrics for analysing the supplier’sperformance. Partnership approachAnalysts warn that in many cases, purchasers become soobsessed with features and functionality that they fail to focus enough onthese ‘softer’ elements of the relationship. The best approach is to treat thepurchase as a partnership – vendors can only deliver results if organisationsspell out their requirements in advance. As Snowdrop’s Tobin points out, many users, particularly inthe public sector, now host an open day for suppliers where they present theirstrategic plans and perceived challenges before inviting proposals. That givesthe vendor an opportunity to understand the organisation’s unique requirementsand make an informed decision as to whether to bid. Above all, users need to be cautious about information theyreceive. Many rely on vendor presentations, but these will clearly be slantedtowards product strengths. Speaking with – and preferably visiting – existinguser reference sites is also recommended. Personal demonstrations – where theagenda is drawn up by the user, as opposed to a generic presentation from thesupplier – are also a good idea and can cut through much of the hype.In essence, much of the payroll purchasing process comesdown to common sense. But users frequently come to the table unprepared. AsRebus HR’s Gordon concludes: “Be very clear about your business, yourpriorities. Clarity is important – not the vendors’ bells and whistles.”The self-service revolution According to Kevin Gordon, strategic sales director atRebusHR, about half the enquiries coming in from potential software purchasersinclude requests for electronic payslip delivery – one of the most prominentcost-saving elements of employee self-service systems.To date, much of the focus in the self-service market hasbeen on achieving process-based cost savings. By allowing employees to enterdata directly into HR systems over a corporate intranet – be it a change ofhome address or enrolment into a new benefits scheme – HR departments can cuttheir own administrative burden and also offer a 24/7 service to employees. Data self-entry has the advantage of reducing the need forrekeying and therefore decreases the likelihood of errors – employees arelikely to be particularly cautious about entering information correctly when itdirectly affects their pay cheque. Moreover, as self-service systems evolve,they become a platform for collaborative team working and a mechanism fordistributing corporate, industry and sometimes non-vocational information. Because of the breadth of the potential for self-service HR,analysts advise that payroll implementations cannot be viewed in isolation.While distributing payslips electronically to employees’ desktops is apayroll-specific application, many other elements cross HR boundaries. Payrolldata, for example, can form the basis for more effective distribution ofmanagement reports through the self-service infrastructure in areas such asovertime or headcount analysis. Lee Geishecker, research director at consultancy Gartner,suggests: “Think of payroll as part of the bigger picture in self-service. Weare moving away from a functionality focus – it’s part of broader HR.”last_img

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